Breaking the covenant of trust

The Solicitors Regulation Authority has launched a significant programme of radical regulatory change. From my own discussions and those of my staff with the profession, insurers and brokers, and with representatives of the financial institutions, I know how seriously these proposals are viewed.

The breathtaking speed, for which there seems to be no clear justification, and the broad scope of the four consultation papers, have diverted considerable resources of the profession and of those who do business with and for the profession. Yet this is just the beginning. The SRA has made it clear that it is embarking on a two-year programme of reforms and that we can expect more to follow.

We need to stop and take stock of whether this is the right way to proceed.

These consultations represent real-life practical problems for the profession. No overarching vision or goal has been articulated by the SRA. There is no sense of what it is the SRA seeks to achieve, nor of what it intends to replace current arrangements with. This makes it difficult for the profession to do more than respond to the unseemly haste and the torrent of specific changes.

This approach is short-sighted. It ignores the need for a high-level, top-down assessment of how to modernise client financial protections. Central to this is the extent to which the profession should continue to maintain complex and expensive structures to ensure that any client who suffers loss at the hands of an incompetent (or worse) solicitor should be compensated.

The SRA board meets on Wednesday to discuss the recommendations on whether it should go ahead with implementation in October. I hope it will heed the informed warnings from all quarters not to rush into making changes which remove what is good about the status quo without something better to replace it. If it does not, it risks triggering unintended negative consequences for firms and for consumers which, significantly, could undermine the public’s trust in the profession. Such trust, once lost, will be hard to rebuild. Given the strength of my own concerns and those of the Society, we have requested the SRA give us the opportunity to present those concerns personally at the SRA board meeting.

Regulation of a profession as diverse and complex as ours will never be easy. But the fact that the SRA’s toolkit is not ideal and the governing legislation labyrinthine, does not mean that throwing out what is difficult to apply will make the SRA’s task any easier. Rather, the SRA might consider how to use the toolkit more smartly. That includes how it uses its consultations to achieve outcomes which meet the regulatory objectives of the Legal Services Act.

Consider the example of the proposal to remove the requirement that all firms holding client money must submit an annual accountant’s report. A simple idea which will lessen the administrative burden and cost to firms. Yet a few informal checks with our stakeholders, preferably before the consultation started, would have shown that the result of this change risks being quite the opposite.

Insurers, brokers and financial institutions value firms’ accountants’ reports for their fraud deterrent effect. Many firms will continue to commission them as part of the professional guarantee to clients, and for the benefit of their business and their COFA. The SRA will say that there is nothing to stop them. But the reason for making them compulsory is that they are a useful early warning device for the SRA that that client money may be at risk. The problem for firms, in fact, lies in the complexity of the Solicitors Accounts Rules, which under this proposal remain unchanged.

A review of these rules to make them simpler and easier for solicitors to comply with would be a better way to deal with the problem the SRA has highlighted of a high proportion of reports being qualified, while retaining an important tool for the SRA to do its job effectively.

As with the proposal to make it a regulatory requirement for firms to assess that they have sufficient insurance over and above the proposed new compulsory minima, this proposal seems likely to increase, rather than lessen, the costs and burdens for many firms while risking consumer protection. There are other examples of SRA proposals for changes to the client financial protections which, at face value, look attractive for high street firms but, in reality, could result in them losing areas of work, such as conveyancing.

Smaller firms are likely to find they and their clients are exposed to greater financial risk as the safety nets that exist in the current protections are dismantled. If the SRA wants to lessen the costs and burdens for smaller firms, it might usefully examine the feasibility of a derogation for them from outcomes-based regulation.

None of the above is to say that the current arrangements are perfect and should not be reviewed in the light of market evolution. The problems with the PII market are well known. But it is the haste with which untested changes, which are likely to cause damage to clients and therefore to the reputation of the profession and its regulator, are being pushed through, that is of grave concern.

Rather than implementing ill-thought-through ideas, the SRA could harness the wealth of expertise of its stakeholders by working collaboratively with the profession and with the profession’s service and work providers, such as the insurance industry, and the financial institutions and lenders. Competition authorities and the economic regulators are required to consult market players when formulating remedies aimed at opening up competition, to release consumer benefits and to promote economic growth. The SRA should observe those principles.

The views and evidence from various stakeholders that have been emerging during the short consultation period strongly suggest that the SRA must urgently rethink. This raises some fundamental questions about how change of this type should be addressed. Reference to the government’s Better Regulation Delivery Office Regulators’ Code would be a good starting point.

This is perhaps harsh advice. However, the Law Society cannot stand idle and watch while the profession’s historical covenant of trust with the public is risked, and firms suffer increased costs and burdens while losing business for the sake of vague, unsubstantiated aspirations for greater inclusion of consumers currently denied access to legal services, the delivery of which has no connection with the proposed changes.

It is vital that the SRA does not continue at the same pace and with the same lack of evidential base when it embarks on the next tranche of consultations.